Indianapolis Books
Hotel Expansion

Hotel developers are still revving up their engines in Indianapolis, home to one of the world's most celebrated car races, betting that tourists will fill new rooms despite the twin specters of a recession and overbuilding.

More than 1,400 new hotel rooms are under construction and expected to be finished this year in the Indianapolis area. That will push the total number of rooms up to 30,109, up by about 5% over last year, more than double the national growth rate of 2.2% according to Smith Travel Research, a Hendersonville, Tenn., lodging research firm. Several thousand more rooms -- from economy to high end -- are planned.

The hotel boom comes as some analysts say increasingly cost-conscious leisure and business travelers could ratchet down spending, raising the possibility that the Indianapolis region's hotel boom will overshoot demand.

Jan Freitag, a vice president at Smith Travel, says smaller markets like Indianapolis could be more vulnerable to a slowdown in travel demand because the less developed markets generally have fewer constraints on supply. They also don't have as varied a base of customers to fill any new hotels during a downturn. "It will be interesting to see how secondary markets pull through," Mr. Freitag says.

Hotel developers' confidence in Indianapolis is one of the bright spots in a low-cost commercial real-estate market where rents and vacancies don't typically outperform national benchmarks. Additionally, the city's access to more than 35% of the country's population in a day's drive has made Indianapolis a strong warehouse distribution market.

Job growth in the region, home to about 1.8 million residents and such companies as insurer Conseco Inc. and drug maker Eli Lilly & Co. as well as a shrinking manufacturing sector, rose about 1.1% in December from the year earlier, just above the nation's rate of 0.9%, according to the U.S. Bureau of Labor Statistics.

Fourth-quarter hotel-room rates were about 21% below the national level and occupancy levels were slightly below the national rate, according to Smith Travel. Office, retail, warehouse and apartment rents were all well below national averages and vacancies were above average.

Office, warehouse and apartment rents in the area are expected to rise through 2012 while retail rents will fall steadily as a slumping housing market and reduced consumer confidence collide with record construction levels, according to Property & Portfolio Research, a Boston-based research firm. Median home prices slumped 2.6% in the fourth quarter to $114,000, well below the national median of $206,200, according to the National Association of Realtors.

Some hotel developers are encouraged by a tally of visitors to the Indianapolis area that rose about 22% from 2003 to 21.9 million in 2006, according to a spokesman for the Indianapolis Convention & Visitors Association. That's helped to increase hotel occupancy levels, though they remain below national averages, according to Smith Travel.

In recent years, the Hoosier state capital region raised its profile as a destination despite its lack of oceans or mountains and a low-key heartland location.

Robert Canton, director of the sports, convention and tourism practice at PricewaterhouseCoopers, says the city's convention center boasts one of the nation's highest occupancy rates as a result of its concerted efforts to build a downtown infrastructure that offers interconnected convention, hotel and entertainment space.

The region is also more affordable than some higher-profile convention destinations. For example, average fourth-quarter hotel room rates in the Indianapolis area were $83.16, below the $105.20 average in Orlando, Fla., and $129.54 in San Diego, according to Smith Travel.

Those offerings are again being upgraded. This summer, construction is expected to start on a $425 million JW Marriott complex containing nearly 1,600 rooms, which will be connected to the convention center that is being expanded. Also this year, the $700 million Lucas Oil Stadium, the new home for the Indianapolis Colts, is slated to be completed, and a new $1.1 billion terminal complex will be opening at the Indianapolis International Airport.

Michael Wells, president of REI Real Estate Services, of Carmel, Ind., which is co-developing the JW Marriott, believes the credit crunch could ultimately benefit the local hotel market by thinning the supply pipeline. He's also optimistic that Indianapolis' lower cost and less-congested downtown will continue to boost demand from travelers. "We'll continue to get the bread-and-butter business and we'll do very well," Mr. Wells says.

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